Research finds that high pay results in overconfidence and gung ho speculation
An academic paper by Michael Cooper (University of Utah), Huseyin Gulen (Purdue University) and Raghavendra Rau (University of Cambridge) produced some interesting findings regarding the relationship between pay and performance:
The authors conclude as follows:
We find evidence that CEO pay is negatively related to future stock returns for periods up to three years after sorting on pay. For example, firms that pay their CEOs in the top ten percent of excess pay earn negative abnormal returns over the next three years of approximately -8%. The effect is stronger for CEOs who receive higher incentive pay relative to their peers. Our results appear to be driven by high-pay induced CEO overconfidence that leads to shareholder wealth losses from activities such as overinvestment and value-destroying mergers and acquisitions.
The full paper is available here